Thursday, September 25, 2008

More Thoughts on the Federal Handout to Banks

1) Hank Paulson (already) wants to expand the program to car loans, credit cards, and other “troubled” assets. I am finding it increasingly difficult to willingly suspend my disbelief.

2) Unintended consequence alert: Debtors now have increased incentive to default as it becomes cheaper on the margin for creditors to seek recourse from the government as opposed to spending resources on collection. Collection agencies may falter as the new and improved Treasury moves in on their business model. Perhaps there is opportunity in facilitating planned defaults. Put It Back In The

3) Money market funds have been breaking the buck on a regular basis over the past 12 months; it just so happens the parent companies have all stepped in to bail them out. They did not legally have to do that, so it should have been clear that the time when one firm finds it in its best interest to let the fund's Net Asset Value drop below $1 per share would come. Anyone (in the financial industry) unprepared for this was simply not paying attention.

4) The banks are not going to take their new found wealth and lend it to a waitress who wants to buy a view condo. They’ll buy treasuries and head for the beach. The big picture is this: A large amount of financial capital is being forced to chase bad debt. Real economy capital expenditures will have to take a hit. Ironically, the broader economy may follow the banks in contracting their operations. Whole Foods will become a cheese shop. Starbucks becomes a bring-your-own-latte joint. “We supply the ambience.” Airlines will stop giving us water.

Excuse me, that last one is the result an unrelated economic crisis.

These pagliacci may well succeed in causing the very infection they claim to be saving us from.

5) Ultimately, foreigners will have to demand higher nominal returns. One would think this would be the bamboo shoot that breaks the panda's back, but maybe they hold out a bit longer. Soon enough, interest rates will soar or the Federal Reserve will significantly expand its balance sheet or a combination. If I had a lot of money to invest long-term, I’d put half in gold/oil/wheat and sell short long-dated treasuries with the rest.

6) There’s another meaningful contrast to the Japanese crisis (in addition to the vastly divergent savings/consumption cultural attitude). It is one thing for domestic banks to hoard cash; it is altogether different to expect foreigners to do the same. I’m guessing but I don’t think JGBs were bought up by foreigners. Isn’t the yen carry trade, in fact, the exact opposite?

7) What are the chances that the dictatorial powers in the initial proposal are designed to divert attention from the actual theft of taxpayer money, making the final version a “compromise?” I want to sell short the bipartisan consensus.

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